MARKETS STILL OUT OF SYNC - May Update.
THE USD, GOLD & COMMODITIES
1. USD Perspective
Short to Medium Term
Much of the recent volatility in currencies, commodities and equity markets, is all too often blamed on the statements of a Ms Yellen or Mr Draghi, the JCB, the Chinese economic slowdown and of late, the US election dramas. But how do the fortunes of the US dollar affect the rest of the world?
Traditionally, the USD is in a close relationship with precious metals and major commodities, as they are predominantly traded and priced in USD. Will that change? What will happen to commodity prices, global markets, the EUR, and the currencies of Asia-Pacific region?
Traditionally, the USD is in a close relationship with precious metals and major commodities, as they are predominantly traded and priced in USD. Will that change? What will happen to commodity prices, global markets, the EUR, and the currencies of Asia-Pacific region?
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| USD since August 2015 to end of April 2016 (with enlarged cut-out of the orange oval marked period from April 25); SOURCE: Chartnexus |
My first chart shows the USD from August 24, 2015 to May 4, 2016. This period is full of meaningful Fibonacci aspects, which is why I am quite confident about my near-term prognosis.
To provide a closer look at the near-term movements since April 25, please view the cut-out on the right. It is the enlargement of the orange oval in the main chart.
Observations for Consideration
By end of April, there is a confluence of Fibonacci pattern, suggesting that this 8.3-month cycle may be complete:
- The Fibonacci time zones (Black vertical lines) put the price movements into an obvious time structure: In Zone 1-9, the trend is up, stops abruptly and turns sideways in Zone 10, and in Zone 11 erases the entire rally. The black vertical lines are the exact time keepers.
- Fibonacci retracements: Starting at 91.18 on August 24, prices extended to 100.5 on December 2, 2015, which is a formidable resistance level last visited in March 2015. From there, prices fell till May 2, 2016, erasing the entire rally and coming to an abrupt stop - at 91.18 again! NO, it is NOT a typo or a coincidence!
- Fibonacci Fan lines since MAY 2011: Please observe the green candle on May 2, the turnaround day in the orange oval / enlarged portion. Its tail is extending far lower than than its body. It ends within a few points of a rising Fibonacci Fan line that I drew from MAY 2011, marking the lowest level of an upward trend that has been 5 years in the making, and - has yet to break down.
- All this is happening within a few trading days of the last Fibonacci time line of the chart (May 9).
SHORT TERM OUTLOOK
Since May 2, the USD has been rebounding, accompanied by solid buying volume. I surmise that the rebound move will culminate around early June, regaining the heights of April 22 at 95.18, the 38.2 Fibonacci retracement level, which served as a strong resistance in April. For this coming move up, I don't expect the dollar to exceed this level.2. GOLD
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| 6 month chart of gold prices in USD, SOURCE: NASDAQ |
Prices of precious metals are influenced more often by the strength or weakness of the USD and the trend in the global stock market. Their relationship is considered INVERSE in both cases, though actual prices do not follow this rule at all times!
Just a couple of days ago, prices reached an intermediate high of $1304. The lowest point of recent months was $1045, on December 2, 2015, the same day when the USD peaked. A secondary low ($1084) followed mid-January, while the USD recorded a secondary peak, accompanied by a slumping equity market. Since then gold prices rose 24%. Many of my clients could bank similar and better returns, depending on the investment tool we chose.
In my portfolios, we had been building up our precious metal holdings since December 2015. The final top up was made in early March. My most recent instructions to my operations team pinpointed Monday, 2nd of May, as the exit day from all precious metal holdings. We got out when gold clocked $1302. Gold prices have since fallen to $1277.
3. Silver
A very similar pattern presents itself in the silver chart. From low to high over the same period the gain is 26% in USD terms. The volatility in Silver prices is more pronounced, as is often the case vis-a-vis gold. I should also point out that the rally in silver accelerates much later than in gold, suggesting that its correlation to USD is closer than to gold.
Still, it is hardly the only driving factor.
Fears of a fall in equity prices often leads to asset rotation into precious metals and gold in particular. People will sell their equities and switch to gold/silver certificates, ETPs and funds. Buying physical gold and silver is not so much a feature in asset rotation. Those who buy the physical metal tend to hold onto it for the longer term.
The current sound bites of gold imminently making a major move are always tempting to the ear, but I must ask you to refrain from a large purchase right now. These statements arise more often AFTER prices have already rallied strongly, and VERY RARELY when talking heads see prices as down and out. You must have noticed that before...
Still, it is hardly the only driving factor.
Fears of a fall in equity prices often leads to asset rotation into precious metals and gold in particular. People will sell their equities and switch to gold/silver certificates, ETPs and funds. Buying physical gold and silver is not so much a feature in asset rotation. Those who buy the physical metal tend to hold onto it for the longer term.
Short-Term Outlook for Precious Metals
I consider the low points last December and January this year as longer term pivot points in the price structure, possibly marking the end of the bear market in precious metals, which started in November 2011. Consequently, these pivot points must not be breeched in the near future, certainly not before July, or indeed at any other time in 2016. If it does, then we could enter a new era of USD domination, - not out of the question, considering the positioning of the FED and the protectionist ideas that virally sprout in the US, though not limited to the US.
I already mentioned above that the USD will strengthen for a while. In the interim, this should keep prices in precious metals down, though a weakening in global equities could create an environment of uncertainty again, when people will be more inclined to buy into gold as a safe haven. In short, at best, precious metal prices will stay range-bound within $1300 and $1245 for an ounce of gold, and $17.5 and $16 per silver ounce. Breeching any of these levels would signal the start of another strong trending move and you will read about it in this blog in good time.
For a review of these conditions, please refer to the previous posts:
Financial Markets Out Of Sync Part I
Financial Markets Out Of Sync Part II
Financial Markets Out Of Sync Part II a)
In each of those I pointed to the period of April/May as a game changer after the rally since mid February. In our model - as in our real portfolios - we captured the opportunities in accordance with the risk profiles we adhered to. Our Model Portfolio is deemed suitable for investors with a medium to high risk profile, targeting more than 10% per annum. To learn more about the actual performance, please click here.
5. COMMODITIES
Especially those commodities, which depend on Chinese consumption, will probably see especially volatile prices in the coming weeks. But even those, which are affected by weather conditions and seasonal changes will see volatility. I analyse cyclical forecasts for these assets. This is how I see the next few month, in some cases even longer term:
- Crude oil - considered the trigger asset for the economy either way - shows up in cycles as erasing all recent gains by December 2016. If low oil prices continue to place a handicap on the global economy, this outlook forebodes dire economic times. Bet your bottom dollar that the incumbent government in the US will try and show up a different picture!
- Wheat - very much a seasonal product - should see its prices rise into August, and possibly beyond. Sugar and Corn show similar tendencies. Does that mean bread and other foods will see spiralling prices? Will inflation pressures come up suddenly? Most think not. Interest rate rises should quickly dampen any excesses, the pundits say.
- Coffee has seen falling prices since November 2014. The cycles do not suggest much of a change in direction. That is in line with soja beans (till end of July), but it contradicts what is happening to Wheat, Sugar and Corn currently.
SUMMARY COMMODITIES
Cyclically, July and August appear to be the likely turning points for prices in many commodities. The triggers for possible changes (=fundamental /economic /seasonal /political) can be foretold, their timing however less so. I continue to watch - and wait for a longer term trend to emerge. Currently, trends are often short-lived and inconsistent, - but an opportunity for the high risk investor.
6. World Currencies and World Markets Brief
If the USD gains in strength another currency must be on the "lower scale", and vice versa. So if the USD is in short term uptrend does that mean that all other currencies must go down? Actually, there are 3 major currencies that will show a 100% INVERSE correlation to the USD. They are the EUR, the YEN, and the Renminbi. The reason? Trade volumes between them are the largest by far. We can exclude the Renminbi. The Chinese government still maintains a high degree of control over its currency and accessibility to foreign traders.
- Presently, 1 EUR buys about $1.14, up from 1.08 in late February. That should change as we speak, though I doubt the EUR will fall below $1.10. This statement is relevant till the end of June.
- 1 USD today buys 106 Yen, down from 121 Yen just over 3 month ago. As the JCB has so far refrained from extending its interest rates further into negative territory, a strong YEN seems to be the only option for the foreseeable future - unless the Federal Reserve hints at or actually goes ahead with another rate increase. The actual strength of economies - or lack thereof - seems less and less influential as to the direction of the next move.
This conundrum, a Yen that remains strong, and the prospect of a weaker EUR, while the central banks of both are hell bent on creating ever greater levels of liquidity, will give rise to more currency volatility, especially in Asia. The currency pair of greatest disparity could become the SGD-AUD pair, whereby the Aussie dollar will assimilate and grow with a higher gold and other commodity prices, while the SGD will suffer from a lack of foreign cash flow, weakening economy and lower stock prices.
Summary
The markets, asset classes, regions and countries remain out of sync, preventing a major change in the direction of stock markets, which is maybe the most positive aspect of it. As and when markets, investor cash flow and momentum become more closely correlated then we must be prepared to face some major changes. Just when this period will arise - this year, next year or whenever - is less obvious to assess than most analysts claim. I stick with what I see in my cyclical research. Up until now, it provides a mixed picture. We are in a time when it is better to look beyond the many obvious expectations and learn how to discern the probable from the hundreds of imaginary and theoretical options.
Stay tuned.
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